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NEW YORK--Three former top RenaissanceRe Holdings Ltd. executives were charged by federal regulators Wednesday with securities fraud for allegedly orchestrating a finite reinsurance scheme that regulators say was designed to smooth company earnings and mislead investors.
The Securities and Exchange Commission's complaint, filed in a Manhattan federal court, charges that RenaissanceRe's former chairman and chief executive officer, James N. Stanard--along with former Controller Martin J. Merritt and former Senior Vp Michael W. Cash--structured and carried out a two-part reinsurance transaction with Inter-Ocean Reinsurance Co. Ltd. to smooth and defer $26.2 million of Pembroke, Bermuda-based RenaissanceRe's earnings from 2001 to 2002 and 2003.
Inter-Ocean, a Bermuda-based finite risk reinsurer previously managed by American Reinsurance Co., went into runoff in early 2005.
The purpose of the two separate but related contracts, according to the complaint, was "to store excess earnings so that RenRe could draw on them if the company incurred large insurance losses in the future.
The impetus of the deal was an e-mail sent by Mr. Standard to Messrs. Merritt, Cash and others asking them to try to "structure a ceded contract that allows us to 'put away' $25 million," the suit says.
Additionally, the former officers knowingly misrepresented or omitted key facts surrounding the deal--including its lack of risk transfer and income-smoothing purpose--to mislead the company's auditors, the complaint alleges.
The civil enforcement action by the SEC follows so-called "Wells notices" issued by the agency last year to Messrs. Stanard and Cash and to RenaissanceRe itself, and seeks permanent injunctive relief; disgorgement of ill-gotten gains, if any, plus prejudgment interest; civil monetary penalties; and orders barring each defendant from acting as an officer or director of any public company.
Wells notices indicate that SEC officials plan to recommend that the agency levy charges of violating federal securities laws.
Of the three individuals charged in the complaint, only Mr. Merritt--who according to his attorney Robert Plotkin was never a Wells notice recipient--agreed to simultaneously enter a partial settlement of the commission's claims against him, the SEC said.
As part of his settlement agreement, Mr. Merritt consented to the entry of an anti-fraud injunction and other relief but neither admitted nor denied any wrongdoing.
"He is happy to have this resolved and move on with his life," said Mr. Plotkin, an attorney with the Washington-based law firm McGuire Woods L.L.P. Mr. Merritt could still face potential monetary penalties from the SEC, Mr. Plotkin noted.
In a statement, Mr. Stanard's attorney, James D. Mathias, of DLA Piper U.S. L.L.P., denied any wrongdoing by his client, noting that Mr. Stanard engaged in due diligence with regulators following the discovery of RenaissanceRe's accounting errors.
"Mr. Stanard did not commit fraud or engage in any misconduct. While we are disappointed that the SEC has made these allegations, Mr. Stanard looks forward to the opportunity to vindicate himself," Mr. Mathias said.
"The single, two-part 2001 transaction that is the subject of the SEC complaint was restated in February 2005 at Mr. Stanard's direction after an internal investigation, voluntarily initiated by Mr. Stanard, of RenRe's reinsurance contracts and business practices found only one transaction that was incorrectly accounted for, out of thousands that were subject to the review. Mr. Stanard and Renaissance brought this transaction to the SEC's attention, and Mr. Stanard has cooperated fully throughout the resulting government investigation," he said.
"The independent directors of RenRe's board, advised by the law firm that conducted the internal investigation, concluded that the single accounting error was the result of mistakes, not misconduct," Mr. Mathias said. Representatives for Mr. Cash issued a statement denying the allegations in the SEC's complaint.
"Indeed, Mr. Cash was never responsible for RenRe's publicly filed financial statements. He should not have been named as a defendant in this case," the statement said.
"This is another case arising from our ongoing investigation of the misuse of finite reinsurance to commit securities fraud," Mark K. Schonfeld, director of the SEC's Northeast Regional Office, said in a statement. "The defendants enabled RenRe to take excess revenue from one good year and, in effect, 'park' it with a counterparty so it would be available to bring back in a future year when the company's financial picture was not as bright."
RenaissanceRe--which in July said it made a $15 million settlement offer to the SEC related to the agency's investigation of the company's February 2005 restatement of earnings--on Wednesday said it does not expect any impact against the company as a result of the charges leveled against its former officers.
The SEC staff has recommended the proposed settlement to SEC commissioners, RenaissanceRe said.